Why High Oil Prices Are Bad … for the Sellers

Although OPEC remains in the American imagination essentially an Arab organization, with its meetings ending in those great visuals of the sheiks sweeping through palatial hallways in their flowing robes, the key player in the output cutbacks that have propelled oil prices up near $30 has actually been Venezuela, thanks to the work of its new oil minister, Ali Rodriguez. Venezuela is OPEC’s second-largest producer. In the past, it’s also been OPEC’s most notorious cheater on the quotas that each member is supposed to obey. But Rodriguez has stayed firm in his commitment to the output cutbacks, even as OPEC members have started talking about the need to bring prices down.

In one important sense, this is of course a good thing for Venezuela, which under its new strongman president, Hugo Chavez, has been trying to rebuild an economy that gives disarray a bad name. Oil is Venezuela’s most important export, and its most important source of foreign currency and state revenue. In 1999, the country’s exports fell more than 15 percent (its imports also dropped sharply). Assuming that oil prices stay above $20 a barrel for the rest of this year, those numbers should be significantly better.

The problem is that insofar as higher oil prices encourage Venezuela to rely on its natural resources for economic growth and job creation, they probably do more long-term damage than short-term good. This may seem counterintuitive. We all know that, in general, it’s better to have resources than not, and certainly an important part of America’s economic history is about the exploitation of its remarkable natural wealth, mineral and agricultural. It’s just as hard to imagine America’s steel or auto industries without the Mesabi Range than it is to imagine Nevada without the Comstock Lode.

But the American experience has not, in fact, translated especially well to other countries, particularly in the 20th century. That may be because most of the United States’ natural resources were subject to private exploitation rather than becoming foundations of the state economy, and it also probably has something to do with the sheer size of the U.S. economy, which was never going to be dominated by a single industry. Along the same lines, the tremendous variety of U.S. capitalism–that is, the incredibly diverse kinds of businesses that proliferated under it–meant that while gold rushes and oil booms would play important economic roles, they would not necessarily stifle growth elsewhere.

In much of the world, though, the connection between natural resources and strong economic growth is quite weak, and some studies have suggested that countries with fewer natural resources–like, most obviously, Japan–are more likely to grow faster. The argument is not a difficult one to understand. In today’s global economy, tying yourself to a commodity product means tying yourself to the whims of a marketplace that, at least for the last 20 years, has been driving commodity prices steadily down. More important, the oil industry cannot provide the kind of technological spillover that seems to be playing a key role in boosting U.S. productivity. You can get better and better at pumping oil–although since OPEC is a cartel, even the pressure to get better at pumping oil is less than it should be–but that does nothing to help the rest of the economy get better at what it’s doing.

On a deeper level, reliance on a state-owned oil company fosters a completely misbegotten idea about how wealth is actually created. With oil, it seems fairly simple: Those who have it, reap the benefits. (It’s more complicated than this, but not much.) But with almost everything else, wealth is not just there for the taking. It has to be created, through the transformation of time–via work–into value. And you can only grow an economy if you keep getting more value out of the same amount of time. This is central to why capitalist economies work. It has very little to do with living off natural resources.

It’s true that Venezuela is attempting to restructure its economy in other ways, many of them oddly reminiscent of things like the United States’$2 1862 Homestead Act and the like. And if the oil-price hike is intended simply to put Venezuela back on its feet after a year in which its economy actually shrank by 7.2 percent, then you can see the sense in it. But when you look at the economies of the world’s major oil producers, with the notable exception of Mexico, it doesn’t exactly give you hope. High oil prices are a great short-term fix. But they’re no long-term answer at all.